Travel Rule: A Key Regulatory Measure to Enhance Transparency in Virtual Asset Transactions

The Travel Rule is essentially aimed at enhancing the transparency of virtual asset transactions by linking blockchain transactions with real-world entities and identities, in order to better manage money laundering, terrorist financing, and counterparty risks associated with on-chain transactions.

The "anonymity" feature of blockchain has been widely used in financial crimes such as terrorism financing, gambling, and money laundering. To integrate blockchain technology into the regulatory framework, regulators require relevant platforms to comply with basic regulatory principles, including KYC( Know Your Customer), market monitoring, and so on. The Travel Rule further requires understanding all parties involved in a transaction, breaking the feature of "anonymity."

Before the Travel Rule regulatory guidelines were proposed in 2019, virtual asset service providers (VASP) only needed to monitor their own customers through the KYC process. When VASP sends a transaction to a counterparty, it is almost impossible to know the identity of the counterparty, which increases counterparty risk and the likelihood of involvement in high-risk activities such as sanctions and illegal trading.

The Travel Rule mainly supervises transactions between platforms, requiring VASPs to obtain, hold, and submit information related to the initiator and beneficiary of virtual asset transfers before initiating blockchain transactions, in order to identify suspicious transactions and take appropriate measures. This allows for the prevention of potential illegal or sanctioned transactions before creating transactions on the blockchain.

The main reasons for the global adoption of the Travel Rule include:

1. Protect investors and reduce the risk of exposure to non-compliant funds.
2. Reduce the risks of money laundering and terrorist financing
3. Enhance the company's ability to manage counterparty risk.

Currently, the Asia-Pacific region is leading in the adoption of the Travel Rule, but the adoption rates in Europe and the Middle East are also significantly increasing. Over the past six months, more and more exchanges globally are complying with or preparing to comply with the Travel Rule. The industry's acceptance of this regulatory requirement is also continuously improving.

Hong Kong will require virtual asset service providers to comply with the Travel Rule starting from June 1. The main requirements include:

1. Collect and share information of varying scopes based on the transaction amount.
2. If the required information is not received, the initiating VASP should be requested to provide it; otherwise, consider terminating the business relationship.
3. Conduct detailed due diligence on counterparties.
4. Verify Ownership of Self-Custody Wallet

There are still some challenges in terms of regulatory implementation:

1. The implementation times vary across different jurisdictions, leading to the "sunrise issue".
2. Some regions have not yet implemented the Travel Rule, affecting the business scope of compliant VASPs.
3. Lack of interoperability between Travel Rule agreements

Overall, the implementation of the Travel Rule is being advanced globally, helping to improve the transparency and security of virtual asset transactions. As more regions adopt this rule, related challenges will gradually be resolved.